Snap reportedly turned down an offer from Google to buy the company for $30 billion, just before Snap went public. Snap’s strong stature among teenagers (and the ensuing growth) has been stunted of late as Facebook has introduced similar features in its Facebook, Instagram and WhatsApp apps. This competition has resulted in Snap’s growth slowing, and has also led to sustained cash burn. Snapchat’s 180 million user base has not seen a strong growth trajectory recently, and the solution to Snapchat’s problems could potentially be an alliance with a larger player, such as Google. But would Google be interested now, and could the companies work out a deal? Below we discuss further.

Snapchat has been grappling with slowing growth in recent quarters, and the company cash burn has been increasing. Despite the strong growth in revenue from a large user base and improving ARPU, the company seems to be struggling with high operating expenses (especially on a per-user basis).

Our interactive dashboard on Could Google Buy Snap? outlines our expectations from a potential merger. You can modify any of the key drivers to visualize the impact of changes on its valuation or results.

How Would Snap Benefit?

Snap would benefit greatly by effectively increasing its user base at a fractional cost per user, something that Google could potentially help with. Google has over 2 billion Android users – and if the company were to package Snapchat with its core set of offerings (Gmail, Maps and other Google services), Snap’s user base could see some solid upside if even a fraction of those 2 billion Android users became daily active users (DAUs) of Snapchat. For perspective, incremental adoption of 10% of Android’s user base would roughly double Snap’s DAUs. While the actual adoption would likely be lower than that – our base case scenario assumes 1%, or around 20 million users – the potential upside is clear.

Furthermore, Google’s ad prowess could also help improve Snapchat’s average revenue per user. In addition to the low marginal cost of customer acquisition by way of bundling Snapchat on Android devices, Snapchat already runs on Google Cloud. Effectively, this means that an association with Google could potentially lead to a reduction in Snap’s operating costs, allowing for margin expansion and a clearer path to positive cash flows.

Trefis

Considering the average EV/MAU of social media giants (Facebook and Twitter), which are much higher than Snap’s, there could be considerable value to be unlocked if the company were to improve growth and turn EBITDA positive.

If Google were to pursue a buyout, it would be interesting to see how much of the upside Google would be willing to share with Snap’s investors. Snap’s stock hitting consistent lows could allow Google to get an attractive deal by paying for a small fraction of the potential synergies (in our model we assume Google pays for about 10% of the value of the potential synergies, given the uncertainty surrounding Snap).

Despite the significant potential benefits, Google’s increased focus on its enterprise business and past record with consumer tech plays (Orkut, Google+ etc) may deter the company from considering a $10 billion+ acquisition of a struggling social media company. But if the company remains interested, this could be a good time to make a move from a valuation standpoint.

Led by MIT engineers and Wall Street analysts, Trefis (through its dashboards platform dashboards.trefis.com) helps you understand how a company's products, that you touch, read, or hear about everyday, impact its stock price. Surprisingly, the founders of Trefis discovered...